MALAYSIAN BANKS RESILIENT AMID ECONOMIC HEADWINDS - S&P GLOBAL RATINGS

Malaysia's banking sector is likely to stand firm against economic headwinds with the sector's asset quality closely correlated to employment given its large share of household loans, according to the latest S&P Global Ratings midyear outlook 2024 report “Searching for calmer waters” released on 17th July.

In a country-by-country report on global banks, the credit ratings provider said “high household leverage poses some risk” although stable employment and adequate household financial assets are mitigating factors.

It also said banks have material exposure to the real estate sector and construction, at about eight% of total loans.

“Oversupply in the commercial real estate market and elevated office vacancy rates remain structural challenges. Banks have been cautious in lending to this sector and have gradually reduced exposure,” the report said.

S&P Global Ratings also forecast that policy rates have peaked, and credit demand could improve with higher economic growth and a rise in corporate demand, led by key infrastructure projects.

It is projecting Malaysia's gross domestic product (GDP) to grow 4.3% in 2024 and 4.5% in 2025, better than 3.5% in 2023.

Besides loan growth being a key credit driver, it also said higher-for-longer rates and cost pressures could raise financial strain for low-income households and small to midsize enterprises. But this is not its base case.

It is instead looking at the overall banking sector and the solid capitalisation (14.9% common equity Tier-1 ratio as of end-2023) and provisioning buffers (1.5% of total loans) to help banks absorb a moderate rise in credit stress.

The report highlighted a few key assumptions. First, it is expecting the deterioration in asset quality “to be manageable” bearing in mind that the sector's non-performing loan ratio could rise by 20-25 basis points (bps) by end-2024 from 1.6% as of end-April 2024.

“This could come from restructured loans, especially (from loans given) to low-income households and small to midsize enterprises,” the report said.

It also said that sustained currency depreciation could affect import-reliant sectors such as manufacturing, construction, and agriculture.

The second assumption is bank earnings “to stay rangebound” when banks' net interest margins “could decline by 3-5 bps” due to intense competition for both loans and deposits.

Over the next two years, it is forecasting a return on assets to stay at 1.2% - 1.3% with upside potential for profitability to come from lower credit costs, that is if large banks choose to write back pandemic-related provisions.